Wednesday, December 19, 2012

My coworkers and I spend a lot of time discussing TV shows, movies, music and P.I. stories. Brock has been pushing Let's Go to Prison for the last two months. I just finished it. It's a surpisingly good flick considering the subject. Check it.

My buddy Brian works in special effects. He's worked on high level stuff. He recently suggested The Core. The Core is apparently so bad it's good. I've yet to verify this recommendation but I intend to immediately.FOLLOW UP: Yeah... Awesomely Awful! Watched it twice it was so bad.

I grew up on film. One of my first memories was at a drive in theater where my dad worked. He stopped by to check on me between shows in a double feature. Good times. My dad and I never stopped going to movies together. If I had a nickle for every movie we snuck into I'd have a lot of nickels. In all the years we snuck into movies we only got caught once. Good times.

When I was in college I had a neighbor who was a movie afficianado. He had nothing but Academy Award winning movies/performances on VHS. That's how I got into The Godfather type films...

If you really want to see a good film just google Academy Award Best Picuture and start with the 60s. This is how I found Midnight Cowboy, Raging Bull and The French Connection. These movies give you insight into things. They make jokes and stories make sense. So.... If you haven't seen one of the movies on the list do a couple shots of your favorite spirit and watch it. If you don't like it try the next. And so on... If you don't hit a film you like within 3 tries you don't need to bother with film. Some people don't like sex. Life's a fucking mystery. I don't bother with people who don't like movies or sex. They don't have much to say that's interesting to me.

The Germans used the 70% rule as a quick and cost-effective way to defer this 10 GW problem the National Grid is so concerned about. You'd think the big brains in the National Grid office would have heard of the 70% rule? I'm thinking the memo system in Europe must be completely fucked at the moment because nobody seems to be getting their messages. But I digress...The secondary solution to the over-production problem is to increase daytime demand. You do this by installing smart appliances that delay start up or shape their demand in coordination with solar production. As an added bonus the smart appliance will also seek out excess wind or thermal production in the dead of night. A smart appliance could also help maintain stable system frequency by shutting down when frequency dips below some critical threshold. These smart appliances may sound magical but it turns out we can put a lot of functionality on a $10 chip. It's great that the Brits and the Germans and the Japanese and Australians et al. have Energy Supply Policies... All we need now is for everybody to realize we need complementary Energy Demand Policies.

I'm no fan of retroactive cuts but there's a lesson to be learned here. If the industry self-regulated itself we wouldn't see these steep subsidy dropoffs. Why has the industry chosen short term gains over sustainable policy? Hmmm... Gonna have to go with greed on that one.

The industry should look at itself in the mirror and eliminate those participants who aren't in the game for the long haul. The players that are left will me much more interested in balanced long-term policies.

Saturday, December 15, 2012

Even with decreasing PV prices, producing equipment that generates solar power at prices competitive with electricity generated from fossil fuels remains a challenge for manufacturers. This is especially true for utility-scale installations, as wholesale purchasers of electricity will compare the cost per megawatt hour of solar power directly with the cost of power from other sources. The cost-competitiveness of solar power is better in the residential and business markets, as the relevant comparison is with the delivered cost of electricity rather than with the generating cost. But even if the popularity of solar systems grows, falling equipment prices are likely to further challenge the profitability of manufacturers and interfere with efforts to sustain a solar manufacturing base in the United States.

These graphics are from the SunShot Solar Vision Study. The question that keeps me up at night is why has the DOE squandered so much effort subsidizing Utility projects if this is really where they see the cost structures of Residential, Business and Utility projects going? As the second graphic shows, the LCOE of utility is lower than the R&B projects but not by much. Or to put it another way, the R&B projects may be marginally more expensive than Utility projects but as previously mentioned they are competing against retail prices rather than wholesale prices. R&B projects may have a minor price disadvantage on the front end but they have a large competitive advantage on the back. As explained multiple times:

A properly designed and operated Residential or Commercial project will use most of its production to offset retail purchasess. Any excess power can be sold into the wholesale market at prices below those of a utility project.

So again, why subsidize Utility projects when we can see that this method of deployment will become uncompetitive and obsolete. You'd rather subsidize R&B projects exclusively because these markets reach sustainability and can be de-subsidized. To me the whole DOE Loan Guarantee program appears to be a political excercise of some sort. One slice of pork for you and you and you and you. What about me? And one for you. But I'm a Vegetarian. I know... That's Vegetarian pork. It's a mystery to me why the NREL et al. type folks go along with this plan.

Wednesday, December 12, 2012

Why guarantee modules for 25 years? Why not guarantee production up to payback? For example, if payback comes in X years go ahead and buy an insurance product that guarantees X years of production. This doesn't prevent module manufacturers from building 25 year modules. It instead reduces the cost of insurance by focusing on eliminating risk only up to payback. Hmmm...

Parkinson's Law was first articulated by Cyril Northcote Parkinson in a humorous essay published by The Economist back in 1955. Cyril was a man after my own heart. The essay is a quick and highly recommended read. The Law’s first formulation was simply.

·Work expands so as to fill the time available for its completion.

A more generalized version of the original goes something like:

·The demand upon a resource tends to expand to match the supply of the resource.

A notable corollary to Parkinson’s Law is the Bennett Hypothesis which was first put forth in 1987 by then Secretary of Education William J. Bennett. The Bennett Hypothesis comes out of this controversial scribble in the New York Times.

·If anything, increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase....Federal student aid policies do not cause college price inflation, but there is little doubt that they help make it possible.

The solar corollary to Parkinson's Law and the Bennett Hypothesis is a two parter.

Part I, Return of the Parkinson:

·Solar subsidies tend to set the price of solar. Who’s gonna bell the cat?

Setting subsidy levels correctly is an essential element of a successful subsidy program. The basic idea is that if you know the cost of a product (within reasonable bounds) you can set the subsidy such that it delivers the desired price. The trouble is that setting subsidies is a dynamic process in the best of times and solar has been an extraordinarily difficult product to price over the last 8 years. Solar prices dropped regularly year over year for several decades until 2003 only to rise consistently from 2004 through 2007 and then nose dive from 2008 through 2012. How does one subsidize this sort of a product? It’s a magician’s task – a game of pin the tail on the donkey.

The difficulty of setting subsidies over the last 8 years in the solar industry led to many markets setting reasonable subsidies for the 2004 to 2007 time frame which became over generous subsidies from 2008 on. This generosity led to development booms and overextended budgets. The busted budgets coincided with macroeconomic shit from the Credit Crisis which in turn led to sharp subsidy curtailments most notably in Spain. When you aggressively de-subsidize an industry before it’s ready to compete you kill that industry. Historically, many de-subsidized industries have seen this play out. The markets in Spain, Portugal and Hungary are case studies in how this part of the story applies to solar.

Solar subsidies have generally been applied in Tiers or categories The idea behind categorizing incentives is to counterbalance economies of scale, favor specific technologies for growth and/or incentivize some social good such as environmental rehabilitation or local employment.

In FiT markets such as Germany, Italy and Australia the Tiers are generally structured like so:

·Small systems: A cents/kWh.

·Medium systems: B cents/kWh.

·Large systems: C cents/kWh.

·XL systems:D cents/kWh

In Quota markets such as the US the Tiers are more confusingly structured.

·Small systems may get X cents/kWh and/or net-metering and/or a buy down subsidy in the form of a direct payment or a tax credit.

·Medium systems may get some combination of the above plus depreciation and/or accelerated depreciation.

·Large and Very Large systems get some portion of the above plus grants, PPAs, RECs and RPS carve-outs.

Both simple and complex subsidy Tiers inherently result in small, medium and large solar constituencies – neighboring rivals with each their own rules and advantages. It bears repeating here that the incentives provided to each Tier are meant to be relatively balanced but in practice things never quite balance as expected.

We also must remind ourselves that the First Principle of solar subsidies is to jumpstart a sustainable competitive market. With any solar subsidy scheme the plan from the start is to eliminate subsidies over time in a smooth and predictable way as the underlying product becomes more competitive. The subsidy reduction plans have worked in Germany, Italy and Australia. The plans have faltered in the US. What's the difference? In a word - BUREAUCRACY. Some markets leash their solar bureaucracies and others allow them to run wild.

Leashed Bureaucracy

In Germany’s case, leashing bureaucracy meant moving from a Six Tier FiT system to a Four Tier system, eliminating loopholes/abuses and steadily reducing the subsidy rates over time. Italy and Australia are both following the same basic course – fewer Tiers, tighter rules and lower subsidies. The reasons to reduce subsidies and eliminate loopholes are obvious. The reasons behind streamlining the Tiers are slightly more complicated.

The first Subsidy Category that’s been repeatedly targeting for restriction and/or elimination has been the 10+ MW Tier. The general pattern we’ve seen in Germany, France and Italy is to first see restrictions which limit development on agricultural land followed by support for these projects being eliminated altogether. The reason for this Tier being restricted first is because it’s the most prone to over-heating.

Another driver behind consolidating the number of Tiers has been the flattening of economies of scale between project sizes. A generic subsidy scheme might initially be set up with graduated subsidies for systems sized W to X, X to Y and Y to Z. If the unit costs of X to Y projects converge with the costs of Y to Z projects you end up over-subsidizing the X to Y projects. The solution to this problem is to consolidate the Tiers with converged pricing.

As it turns out, reducing subsidies and consolidating Tiers are interrelated mechanisms. When you eliminate a Tier you eliminate a constituency pulling for favors. The reduction in bureaucracy makes it easier to subsequently lower and/or modify subsidies for the remaining Tiers because there’s less balancing required.

Bureaucracy Rum Amok

The US has allowed a wide variety of subsidy programs to populate the solar landscape. The interaction of subsidies at the federal, state and local level has resulted in a stacked deck that has favored certain solar constituencies over others. Two solar constituencies in particular deserve special attention: Mega Solar and Third Party Solar.

Mega Solar

For some reason the US never put the brakes on Mega Solar in the way the Europeans did. By my count there are at least 9 mega-solar projects currently under construction in the US that are over 100 MW in size.

·Desert Sunlight – 632 MW

·Topaz Solar Farm – 632 MW

·Blythe Solar Power Project – 575 MW

·Agua Caliente – 333 MW

·California Valley Solar Ranch – 287 MW

·AV Solar Ranch One – 264 MW

·Quinto Solar – 126 MW

·Mesquite Solar Phase 1 – 124 MW

·Henrietta Solar Project – 115 MW

The Europeans had already identified the Mega Solar strategy as overly expensive and were eliminating support well before any of the US projects mentioned above broke ground. The US government apparently didn’t get the memo. If they did they said meh… America! Fuck Yeah!

These days it’s looking like the era of Mega Solar may finally be coming to an end but a terrible amount of damage has already been done. We’ve committed billions to a dead end strategy all the while neglecting First Principles. Instead of focusing support on competitive deployment strategies the US Federal Government single headedly created a solar constituency which has sucked up much more than their fair share of the pie and worked to undermine development in competing Tiers. The US walked right straight into Parkinson’s Curse.

Third Party Ownership

Third Party Ownership has been hailed as the bestest thing on the block by all the solar rags. TPOs operate as sub-category players in the Small and Medium sized solar space. Problem Numero Uno with TPOs is that their competitive edge is founded on accounting tricks which border on fraud. Problem Numero Dos is that the accounting tricks need the Investment Tax Credit to pencil. If SolarCity’s failure to launch is any indication the TPO play is also coming to an end. This is good news but again the damage has already been done. Here’s a short list of least favorite things about TPOs.

SunRun, a prominent TPO, worked behind the scenes to hamstring PACE

TPO companies have been a source of distracting anti-ownership propaganda

TPO companies don't have a sustainable business model

The Law of Demand

Subsidies are useful but they need to be built and maintained with careful attention. A few points are worth repeating here.

·The First Principle of solar subsidies is to choose strategies that lead to sustainable markets.

·With any solar subsidy scheme the plan from the start is to eliminate subsidies over time in a smooth and predictable way as the underlying product becomes more competitive.

If we build our subsidy programs correctly we activate the Law of Demand. Here’s what Wikipedia says about the Law of Demand.

The law of demandis an economic law, which states thatconsumersbuy more of a good when its price is lower and less when its price is higher (ceteris paribus)

Here are the ceteris paribus criteria

·Habits, tastes and fashions remain constant.

·Money, income of the consumer does not change.

·Prices of other goods remain constant.

·The commodity in question has no substitutes or is not in competition by other goods.

·The commodity is a normal good and has no prestige or status value.

·People do not expect changes in the price.

·Price is independent and demand is dependent.

I underlined factor six specifically because the U.K. market has seen flattish demand in 2012 despite significantly lower prices. I suspect the combination of all the bad press in the market following the FiT cuts coupled with factor six has flattened demand. It’s a temporary problem but a problem just the same.

In conclusion, if a subsidy program results in lower prices (ceteris paribus) it should also lead to higher demand. The higher volumes drive efficiencies which result in even lower prices which then drive higher demand – a virtuous cycle. This is how we should do solar.

Tuesday, December 11, 2012

A big deal was made when First Solar got manufacturing costs below $1/Watt. The industry has come a long way since then. Here's the first complete PE system I've found with total system costs under €1/Watt. An extraodinary feat.